Javier Blas – Financial Times February 24, 2008
When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.
He added a twist – that rising agricultural raw material prices would translate this year into sharply higher food inflation.
“I hope you enjoy your meal,” Mr Lapp told delegates during a luncheon. “It is the cheapest one you are going to have at this forum for a while.”
His warning that a strong wave of food inflation is heading towards the world economy was met by nods from agriculture traders, food industry executives and western’s government officials at the USDA’s annual Agricultural Outlook Forum.
Larry Pope, chief executive of Smithfield Foods, the largest US pork processor, warned delegates of a wave of “real food inflation” just at the time central banks were under pressure to cut interest rates.
“I think we need to tell the American consumer that [prices] are going up,” he said. “We’re seeing cost increases that we’ve never seen in our business.”
The comments highlighted one of the conference’s main concerns – that rising agricultural prices have reached a stage at which the impact will be felt not only on fresh food but will also filter through the supply chain and raise the cost of processed food.
Tom Knutzen, chief executive of Danisco, one of the world’s largest ingredients companies, said rising vegetable oil costs made it more expensive to produce preservatives, colourings and flavourings.
“Our products are based on vegetable oil. “Our input cost has gone up so we are increasing prices,” he said in an interview in Brussels. He added that preservatives, colourings and flavourings made up only 1-2 per cent of the cost of food but there would be a ripple effect as they were present in almost all the food sold worldwide.
US agriculture officials forecast that food inflation will rise this year at an annual rate of 3-4 per cent, warning that the risks were skewed to the upside. Last year, food inflation rose 4 per cent, the highest annual rate since 1990.
Joseph Glauber, the USDA’s chief economist, said in an interview that until now some companies had absorbed the rise in commodities prices, but that trend was about to change.
He said that wheat prices had previously moved from $3 to $5 a bushel without significant pain for consumers. “But now the wheat price has jumped to nearly $20 a bushel. These large increases will show up [in consumer prices].”
Some people hope a slowdown in the US or global economy would push down agricultural commodities prices. But Mr Glauber said that would have a limited impact on agriculture commodities prices. “I am more concerned about higher prices than lower prices.”
However, Simon Johnson, chief economist at the International Monetary Fund, said in an interview that for most agricultural commodities and metal markets the global slowdown would push prices down.
“The commodities market believes in the decoupling of developing countries’ growth,” Mr Johnson said. “The IMF does not believe in decoupling to that extent.”
But even if commodities prices do slow down, other forces could still push consumer prices higher, food industry executives said.
Companies until now have moderated consumer price increases thanks to large inventories and financial hedges in the commodities market futures. But during the course of this year those mitigating factors would vanish, executives said.
“The final result will be higher prices,” Mr Lapp said. The global economy is “at the beginning of a period in which consumer will face higher food prices”.
Additional reporting by Andy Bounds in Brussels
Also see Food shortages loom as wheat crop shrinks and prices rise
Last updated 26/02/2008